Rising stocks and financial assets helped U.S. household wealth grow by $19 trillion during the pandemic to $137 trillion, but wealth inequality has gotten worse, according to a new report
This means that the American household net worth increased by 16% between the fourth quarter of 2019 and the first quarter 2021. It is the longest 15-month streak of gains since 2004, according Oxford Economics.
In a Tuesday note, economists Nancy Vanden Houten (Oxford Economics) wrote that more than 90% of gains in household holdings of real property, equities, and mutual funds “reflect price appreciation with the small remaining balance coming out of new investments.”
In other words: Those who had assets when the crisis hit benefited the most.
The team stated that wealth increased 23% for those who were in the top 1% income distribution, while net worth of those in the bottom income quintile was only 2.5%.
Similar trends have been observed in U.S. savings, with more that 80% of the $2.6 billion in excess savings being held by those who are in the top two income brackets.
All eyes are on the Fed
Jerome Powell, Chairman of the Federal Reserve, has repeatedly emphasized the impact of the pandemic on low-income households in terms both of wealth and health. It was also important that the central bank’s easy monetary policies were tied to the recovery and the regaining of millions of jobs lost in the crisis.
Investors can tune in Wednesday to hear the Fed’s update on the economy and inflation. They will also be able to get insights into the central bank’s thoughts about the COVID-19 Delta variant and its plans for $120 billion monthly asset purchases.
U.S. stock indexes pulled back from record territory ahead of the Fed briefing, with the Dow Jones Industrial Average off 0.2% Tuesday, the S&P 500 index 0.5% lower and the Nasdaq Composite Index down by 1.2%.
Investors expect that consumer spending will drive the economy’s recovery as fiscal stimulus decreases and the central bank thinks about when it should cut back its support for financial market, which could include reducing large-scale asset purchases of Treasurys or agency mortgage-backed Securities.
Who drives?
But big questions remain. There are still many questions about the potential impact of the delta variant on young children who may not be eligible for the shot. There’s also the increase in the cost of living and how that might eat into worker paychecks, potentially putting a damper on consumer spending.
Oxford Economics’ Houten predicts that households will draw down $360 Billion, or 14% in savings, to finance their consumption over the next six quarters. This would support a 9% increase in real consumer spending by 2021 and 5% by 2022.
They wrote that the accumulation of excess savings by households of higher income will support a steady pace of consumer spending, which is just beginning and is expected to continue into 2022.
Another indicator of spending is the issuance of U.S.-backed bonds linked to autos, student loans, and credit cards has already reached $163 billion this year. This represents a 61% increase over the same period in 2020 and 11% more than the same period in 2019. According to BofA Global Research.
According to the Consumer Financial Protection Bureau, credit applications for auto loans, new mortgages, and credit cards were mostly back at pre-pandemic levels in May.
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One exception was for borrowers with subprime or deep subprime credit scores. These were generally 600 and lower and where credit applications were down for any category except mortgage-credit.
“We will continue keeping a close eye on the market as the economic recovery continues to, to help ensure that all consumers have financial products and services which are fair, transparent and competitive,” stated Acting Director of CFPB Dave Uejio in a statement.